Govt offers export sops, but hobbled by fiscal needs

Reuters | Aug 23, 2010 | 6:44pm IST

India on Monday offered incentives to some exporters to help them tide over an uncertain and “fragile” global economic recovery, but said fiscal consolidation might not allow continued support in the future. Trade Minister Anand Sharma, who unveiled the country’s annual foreign trade policy, also said the government would continue to restrict exports of certain food items as it deals with double-digit food inflation. India’s exports, which make about one-fifth of its economy, returned to double digit growth in November after last year’s prolonged slump. However, the pace of growth in the sector slowed to an annual 13.2 percent in July from 30 percent a month ago, reflecting a dampening base effect and demand contraction in Europe and the United States, with the government forecasting an uncertain outlook for the sector over the next six months.

“There is still a shroud of uncertainty over the fragile nature of global economic recovery. Even as global economic rebalancing is proceeding apace, it is not going to be an easy patch for our exporters,” Sharma said. “We also have to be conscious of the need for and the inevitability of fiscal consolidation,” he said. “Suffice it to note that the level of resources available today may not be available in the future.” India has been saddled with a high fiscal deficit and aims to cut the deficit to 4.1 percent of GDP in 2012/13 from 5.5 percent projected for this fiscal year. The need for fiscal prudence stopped Sharma from providing incentives for all export-oriented sectors and instead focus on labour-intense industries and those which are important for capacity expansion in the economy.

As part of the new incentives, the government will allow duty free imports of capital goods until end-March 2012 and provide an interest subsidy of 2 percent to textiles, leather and jute industries for 2010/11. It will also continue to refund taxes paid as custom duties until end-June 2011. Sharma said the additional export incentives would cost the government $214 million in the current financial year.A massive rise in food prices last year following the worst rainfall in nearly four decades saw New Delhi banning exports of certain food items like wheat and non-basmati rice. Prospects of a strong summer harvest this year on good summer rains and a slowdown in food inflation have raised hopes that bans of some of these items will be lifted. But Sharma said as of now there is no proposal to lift the ban on any of these items. “Food price inflation implies that we need to pay close attention to domestic availability. This is why we were obliged to restrict certain exports.”